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Testing forward exchange rate unbiasedness efficiently: a semiparametric approach

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Author Info
Douglas J. Hodgson (University of Quebec at Montreal - Department of Economics)
Oliver Linton (London School of Economics & Political Science - Department of Economics)
Keith Vorkink (Brigham Young University)

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Abstract

We apply semiparametric efficient estimation procedures for a seemingly unrelated regression model where the multivariate error density is elliptically symmetric to study the efficiency of the foreign exchange market. We consider both cointegrating regressions and standard stationary regressions. The elliptical symmetry assumption allows us to avoid the curse of dimensionality problem that typically arises in multivariate semiparametric estimation procedures, because the multivariate elliptically symmetric density function can be written as a function of a scalar transformation of the observed multivariate data. We test the unbiasedness hypothesis on both weekly and daily exchange rate data and strongly reject unbiasedness at the weekly horizon, but fail to reject the unbiasedness hypothesis on the daily data. Estimates of the semiparametric procedure in some cases differ substantially from traditional OLS estimates.

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Publisher Info
Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): VII (2004)
Issue (Month): (November)
Pages: 325-353
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:cem:jaecon:v:7:y:2004:n:2:p:325-353

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Related research
Keywords: forward exchange market; time series econometrics; nonparametric statistics;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

References listed on IDEAS
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    Other versions:
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    Other versions:
  3. Jeganathan, P., 1995. "Some Aspects of Asymptotic Theory with Applications to Time Series Models," Econometric Theory, Cambridge University Press, vol. 11(05), pages 818-887, October. [Downloadable!]
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    Other versions:
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    Other versions:
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  9. Evans, Martin D D & Lewis, Karen K, 1995. "Do Long-Term Swings in the Dollar Affect Estimates of the Risk Premia?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(3), pages 709-42. [Downloadable!] (restricted)
    Other versions:
  10. repec:cup:etheor:v:11:y:1995:i:5:p:818-87 is not listed on IDEAS
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  12. Hodgson, D.J., 1995. "Adaptive Estimation of Error Correlation Models," RCER Working Papers 410, University of Rochester - Center for Economic Research (RCER).
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  17. Linton, Oliver, 1995. "Second Order Approximation in the Partially Linear Regression Model," Econometrica, Econometric Society, vol. 63(5), pages 1079-1112, September. [Downloadable!] (restricted)
    Other versions:
  18. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October. [Downloadable!] (restricted)
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    Other versions:
  24. Baillie, Richard T & Bollerslev, Tim, 1989. " Common Stochastic Trends in a System of Exchange Rates," Journal of Finance, American Finance Association, vol. 44(1), pages 167-81, March. [Downloadable!] (restricted)
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